Buy DITM Calls

Discussion in 'Options' started by matt122333, Dec 23, 2010.

  1. Hello. I'm new to the forum. Is anyone able to provide their insights to buying DITM calls? Do you use sell to open, buy to open, buy to close, or sell to close?
  2. Welcome to the forum---

    Pretty straightforward question. Answer-- buy to open....
    The abbreviation for this is BTO which you will see on this forum fairly often.

    Now, here's my question, also fairly basic, but important so that you can demonstrate necessary understanding: what is the delta of the option you are considering buying?

    If you do not know the answer, don't do anything yet, but we can definitely help you.
  3. spindr0


    Buying or selling to close is just cleaning up a position that you previously took, for whatever the reason.

    Buying to open achieves a stock-like position. The more ITM, the higher the delta and the closer its performance resembles the stock to the upside... but the maximum risk is less to the downside.

    Selling DITM to open mimics a short equity position, higher corelation initially and less as the underlying/delta drops. It can be used as a substitute for hard or expensive to borrow stock.
  4. Spin, you're spoiling the fun!

    I know the answer, and you know the answer, but I was hoping the original poster (OP) would respond.

    To elaborate on what you said, the more ITM a call is, the higher the delta, and delta is a way of calculating how much the call will move relative to a $1 move in the underlying stock or index. A delta of 0.80 would mean that, (all things being relatively equal, and they won't be exactly) that the option will increase in value $0.80 when the stock moves $1.00.

    Now in real life, the reality is that options never exactly track the underlying as the delta predicts, but they will more or less follow as predicted.

    Playing deep-in-the-money calls has one drawback which is the wide bid-ask spread that you will be exposed to. DITM options are often thinly traded, as well, which is also tied to this. On the other hand, if you have a comfortable feeling about a particular stock, you can use them for moderate leverage. DITM are not suited to short term holding unless the stock moves rapidly upward because you will have to pay up to get in and pay out to get out.

    On the other hand time decay is less of a factor with DITM calls, so holding them for a reasonable period of time is not going to slowly bleed you down. You'll only lose significantly if the stock goes down, which is the same risk that stock holders face, too. In fact, if the stock drops dramatically, you will definitely lose less, because the deltas will decline as the stock price drops down toward your strike price. It is still losing, however..

    Hopefully, this is helpful to the OP.

    Merry Christmas, Spin, and everyone!
  5. Thank you so much. I read Lee Lowells book and read more on buying DITM calls. The delta should be 1.00 or .90 so it pretty much moves dollar for dollar of the underlying asset.
  6. I knew the answer already. The delta should usually be 1.00 or .90 or so because you want it to move with the underlying asset as closely as possible. The benefit to it is that I can purchase a very expensive stock. For example, I can purchase 100 shares of NFLX for 18,000 if I got the stock outright. However, with DITM calls I can get it for 9,000 but still take advantage of the performance in the same manner (if not more). I read Lee Lowells book on this and did some researching online to get a better understanding. The main idea is you get to control a position using options for 50% less then the underlying asset. It sounds like a good strategy.

    PS. I am new and I was looking for a good forum board to expand my knowledgebase and this place seem very kind and generous in helping individuals understand better. Thank you very much and I will definitely be contributing traffic to this site.
  7. spindr0


    Mea culpa John - didn't realize I was being a party pooper :)

    Happy holidaze!
  8. cdowis


    You might want to look at the thread "My System" for one example of how you would use them.

    Basically, it is very cost efficient compared to buying stock outright, and you can get that extra bonus of the covered call.
  9. drcha


    One thing you might want to study is which month to use. Near month DITM have lower bid-ask spread than farther months. If you want to retain a position for 2 or 3 months, it might actually be cheaper in some cases to use near month options and roll them. As you probably already know, this is only going to be workable with heavily traded issues.
  10. I am curious for: How about zero liquidity (i.e. with zero buyers) when you want to close the DITM options that you owned? What's the best way for the owner to close this (similar) kind of Far DITM (long) options?
    #10     Jan 1, 2011